Comment by danielmarkbruce
4 days ago
This is bad, don't read it. When you borrow $100 you do not create a liability which includes the interest to be paid.
People who don't understand the very basics of finance and accounting shouldn't write about finance and accounting.
The $100 does become a liability on your balance sheet. You’re right that interest doesnt and is an expense.
In the context of this post, does it matter? He’s not teaching bookkeeping here. He’s explaining the time value of money.
He's explaining the time value of money but uses an example that accrues interest before any time has passed?
He's explaining a bond, ie. it's a promise that you'll get back X+Y in Z years if you give up X now.
It matters because it screams "I don't actually know what I'm talking about". And it's not just a bookkeeping error. It's a conceptual error. It's a complete misunderstanding of the time value of money.
As such, it's a self indulgent piece of writing, not a helpful one.
Seems a little harsh and unkind over what's just a fun article. It's not a news publication or a textbook, it's Phrack, lol. I thought it was neat.
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It was quite a good article if you don't care to nitpick over terminology. Too many technical people avoid the business side of things because they find it boring or are too cynical to engage with it, which limits their impact. Instead we get sleazebag money guys running the world.
The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.
> The people who are in a position to influence the world are those who understand it
are those who can pay people who understand it*
>> Instead we get sleazebag money guys running the world.
Nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).
Yes, at the time of the initial transaction the borrower would not have a liability on their balance sheet that included the interest due.
Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.
It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.
Most of the really stupid stuff written is written in good faith. It's not an excuse. There are many good books written about the financial system, accounting, etc. Rather than writing just another (incorrect) blog post, why not point to the good sources of information?
I didn't say it was an excuse. There is value in articles that correctly synthesize fundamental concepts in ways that bring in new learners who are curious and open to learning. There are things the author gets right, even if they are a bit facile.
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Rather than leaving some oblique references to "many good books", why not provide the actual references?
Because not everyone can read the source. Hence might be better to say let us have better summary or take, not just post to the source guy.
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You are fixating on one tiny point which isn't really that important within OP's ... errm "opus".
Why not critique the entire work?
Anyway:
I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.
However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).
When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.
However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.
All those interests will also end up in additional accounts related to probably banking.
I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.
What gets on my tits is assertions such as "People who don't understand ..." with no working.
Yeah CPA here. On the day you take out the loan you're not in debt 110, you are in debt 100; you would accrue interest expense over the term of the loan. What if the lender called the loan day 2 for some reason? You wouldn't pay 110, probably just 100 plus one day of interest. Goes back to fundamental definitions of financial statement elements. Liabilities are present obligations.
Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.
Also you would not be "in debit"; the liability is on the credit side of your balance sheet.
You failed to check the terms of my loan and assumed it was on an interest basis. I literally told you I borrowed 100 and promised to pay 110. I also failed to note a term and you also assumed there was one. I do mention interest later on so that's a fair assumption, if misguided.
I might be guilty of abusing an industry term or two 8)
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What gets on my tits more is people who are pretty bright in one field (hacking) thinking that entitles them to just brute force their way through reasoning about some other field (finance) that in their arrogance they think is simpler.
... and yet somehow I have muddled along running an IT company for 25 years (I'm the MD) and I have a fair idea about finances, including surviving some rather unpleasant financial environments that have rocked up over those years.
One month in 25 years, my partners and I didn't pay ourselves. That's as close as we have got to having issues. We keep six months payroll, corp. tax and VAT in readies. The property mortgage is nearly paid off.
I'm no hacker and I treat finances as a means to an end - no more and no less.
It bothers me that finance people think they’re smarter than everyone when all their jargon bullshit boils down to SQL statements any senior DB person would understand.
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You can't have taken a class on finance and/or accounting and passed it. This is 101 material, literally. Read the CPAs take.
And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.
Not OP and not an accountant.
I see the reasoning for accountants keeping future liabilities off of the balance sheet. I do this myself in multiple contexts.
Still, when making decisions about whether to take out or grant a loan (personal or business) I need to consider future "value" and cash flows. To someone running a business this is probably more important than the balance sheet. So I think the interest recording criticism is valid but relatively minor in the context of the whole article.
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the US treasury secretary was on calls about whether to bail hedge funds out of gamestop to prevent cascading financial system failures. arguably there is nothing that is too dumb to be written about finance. dont let anyone discourage you.
Various government agencies are on calls to bail out various players in the financial system all the time and will continue to be. That isn't dumb per se.
some things are about other things too. gamestop was peak dumb. nobody knows anything.
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Balance sheets and accounting are made up. You know in maths how you could do calculations on two different ways and arrive at the same result? That's what the author is doing. "Proper accounting" is how you do it, but you could actually just think of it this way. It makes no difference to the end result.
Epicycles in a geocentric model of the solar system is another way of looking at planetary motion. It breaks down due to the required addition of complexity to explain discrepancies between the model and truth, which is the same for this particular situation. In addition to what the CPA said, how does this model work with callable, putable, or floating rate bonds where the interest payment is not known up front?
I understand there's a reason why accountants do things the way they do. But hacking is about looking at things differently. To use your analogy, one can definitely gain insight into planetary motion from a geocentric model even if it's not the best model for all purposes.
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You won't end up with the same result, that's the problem.
If you take that logic to its natural conclusion HN would shut down.
Why not? One of these days YC is gonna fund something worse than Flock and get itself on the Senate's radar.
You mean like when YC-funded startup OpenAI CEO Sam Altman appeared before Congress, or when Garry Tan, YC president and CEO went before Congress and talked about YC startups? The senate's heard of YC, if that's your question.
the sooner the better
touche
But it says 'calling all hackers' so it must be the inside scoop.
A very nit picky comment.
In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.